High-End Securities Regulation

Abstract

The SEC has long taken a hands-off approach to private markets. Instead of direct regulation, the SEC has used investor access restrictions to create high-end contracting environments where investors (in theory) have the resources needed to fend for themselves. But in 2022, this hands-off philosophy was turned on its head. In response to booming growth and concerns about significant harms to public pension plans and other institutional investors, the SEC proposed a sweeping set of regulatory interventions in the $18 trillion private fund industry, a vast and important part of the private market ecosystem.

In this Article, I argue that any efforts to intervene in private securities markets for investor protection purposes should revolve around a basic question: What are the causes of bargaining inefficiency? What, in other words, is stopping well-resourced industry participants from structuring their affairs effectively? Unfortunately, this question was not a central focus of the SEC’s private fund proposal or the comment period that followed. To help fill this void in the policy dialogue, this Article presents the first study asking institutional investors to identify the issues that they think cause bargaining outcomes in private equity funds to fall short of optimality and discusses the implications.

Looking to the future, I predict that the debate over high-end securities regulation in private markets has only just begun, and I call on the SEC, industry participants, and scholars to work together more deliberately to study the causes of bargaining inefficiency in private funds and private markets more broadly. I also introduce a framework to help policymakers and courts determine when the SEC has (and has not) sufficiently verified the causes of bargaining inefficiency before intervening in private markets, and I show how the optimal selection of policy interventions depends on these underlying causes. As the private marketplace continues its stunning growth trajectory, these principles provide an essential foundation to guide the future of securities law policy in private funds and across the spectrum of private markets.